Playing with the Fire: SEBI apologizes to the Supreme Court of India in Contempt Proceedings

The Supreme Court of India in the matter of Reliance Industries Limited v. SEBI has by an order dated December 02, 2022 closed contempt proceedings against SEBI for not complying with Supreme Court’s order dated August 05, 2022 that had held that SEBI needs to be fair and cannot “cherry pick” by adopting selective disclosures and supply of documents.

The background of the matter is an interesting one. The Supreme Court on August 05, 2022 had allowed the appeal filed by Reliance Industries Limited (RIL) for seeking access to and inspection of documents in relation to criminal proceedings against RIL and its promoters.

Genesis of the matter goes back to the issue of Non-Convertible Debentures (NCDs) issued on a Private Placement basis by RIL to various entities in 1994. Subsequent to receipt of a complaint SEBI, after almost a decade, in 2002 decided to investigate. In 2010, SEBI alleged that RIL had funded purchase of its own shares by 38 related entities and thereby violated Section 77 (2) of the Companies Act, 1956 and consequently, violated Regulations 3, 5 and 6 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. RIL, in reply, addressed numerous letters to SEBI requesting for copies of the documents and submitting inter alia that the issue concerning violation of Section 77 of the Companies Act, 1956 was examined by the Ministry of Corporate Affairs (MCA) which had concluded that the transaction was compliant with the applicable law. Subsequently, the Adjudicating Officer of SEBI issued a show cause notice to the promoters of RIL under Rule 4 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 alleging violation of Regulation 11(1) of the SEBI Takeover Regulations (as it then stood).

After the initiation of the proceedings by SEBI, some of the entities to whom notices were issued by SEBI, filed a settlement application in 2011 which was rejected in 2020 and thereafter in 2020 itself a criminal complaint was filed by SEBI under Section 24(1) and 27 of the SEBI Act, 1992. The Special Court heard the matter primarily on the ground of limitation. SEBI argued that limitation did not apply since the offence was a continuing offence. However, the Special Court dismissed the complaint of SEBI on account of the same being barred by limitation under Section 468 of the CrPC (bar to taking cognizance after lapse of the period of limitation) where the period of limitation is one year where offence is punishable with imprisonment for a term not exceeding one year. At the relevant period, Section 24 of the SEBI Act (offences) only prescribed imprisonment of one year. Further, the Special Court was of the opinion that the offence could not be termed as a continuing offence because “for an offence to be a continuing offence, the ingredients of the offence must continue. If only the damage resulting from injury is continuing the offence cannot be termed to be continuing offence”.

SEBI preferred a Criminal Revision Application to the Bombay High Court against the order of the Special Court wherein RIL filed an interim application seeking access to and inspection of certain documents, particularly (i) Report of Sh. Y. H. Malegam, Chartered Accountant; (ii) Written opinion(s) of Hon’ble Mr. Justice (Retd.) B. N. Srikrishna.

RIL contended that the Revision Application could not be considered without having first considered the aforesaid interim application. The Bombay High Court held that the Revision Application would be heard along with the interim application.

RIL challenged the order of the Bombay High Court before the Supreme Court.

The Supreme Court on August 5, 2022 allowed the appeal filed by RIL and directed SEBI to provide RIL with the documents sought and adopt procedural fairness and observed that “…the approach of SEBI, in failing to disclose the documents also raises concerns of transparency and fair trial. Opaqueness only propagates prejudice and partiality. Opaqueness is antithetical to transparency…”. Interestingly, the Supreme Court also observed that “…Initiation of criminal action in commercial transactions, should take place with a lot of circumspection and the Courts ought to act as gate keepers for the same. Initiating frivolous criminal actions against large corporations, would give rise to adverse economic consequences for the country in the long run. Therefore, the Regulator must be cautious in initiating such an action and carefully weigh each factor…”

The Supreme Court was of the view that “SEBI is a regulator and has a duty to act fairly, while conducting proceedings or initiating any action against the parties.”

The Supreme Court further relied upon its own decision in T. Takano v. SEBI & Anr. and held that the reasoning of the court in T. Takano put a general obligation of disclosure on SEBI.

Hence, the Supreme Court in a decision authored by then CJI NV Ramana directed SEBI to furnish to RIL the documents sought and adopt procedural fairness.

Naturally, SEBI was not pleased and filed a review petition. The Supreme Court held that no ground to entertain the review petition of the judgment dated August 05, 2022 is made out and dismissed the review petition on October 19, 2022.

Despite the dismissal of the review petition, SEBI appears to have been dragging its feet in providing the requisite documents that it was ordered to do so by the highest court.

Consequently, RIL filed contempt proceedings against SEBI for non-compliance with the Supreme Court order dated August 05, 2022.

The Supreme Court issued notice of contempt and it was now on December 02, 2022 that Shri KK Venugopal, Senior Advocate for SEBI submitted that the documents in question had been now supplied to RIL and there was “no other intention on the part of the SEBI in not complying with the directions issued by this Court and as the review petition was pending, bona fidely, the documents were not supplied”. In view of the above, the Supreme Court held that “…we accept the apology tendered and close the present contempt proceedings. The contempt proceedings stand closed.”  

The explanation tendered by SEBI was ex-facie quite farcical as in various proceedings it goes ahead to enforce its own orders in the absence of stay orders, and totally disregards the similar defenses taken by noticees that proceedings against the SEBI’s order are pending and therefore SEBI’s order need not be complied with. SEBI clearly had chosen its counsel wisely in this case before the Supreme Court to wriggle out of its disobedience.

SEBI as a regulator is usually very reluctant to accept any adverse orders against it and usually even when an authoritative judgment is given against it, it seeks to avoid the observance of the same in other similar cases arguing the ratio of the case to be limited to specific facts and circumstances and takes hyper technical stand. This approach needs to be changed.

There has been a long-pending demand to have a publicly disclosed cost-benefit analysis before SEBI is allowed to appeal almost every adverse judgment before the Supreme Court or seek external opinions, using public funds. The entire Reliance episode which has been going on now for almost three decades raises a question that why a regulator would resist so hard to even comply with the basic principles of natural justice and fairness. Such resistance from SEBI is not singular, and unfortunately other regulators also adopt the same approach. Various orders of Competition Commission of India (CCI) and Insurance Regulatory Development Authority of India (IRDAI) have been set aside by the appellate forums for the reasons of non-compliance with the principles of natural justice.

It is felt many a times that a sensitization or educational training to the officers of the regulators as to what is the meaning and scope of ‘principles of natural justice’ is very much essential and especially to dispel their notion as if these words are just part of the lawyers’ gimmicks to derail the proceedings.

Another larger issue that arises is how long can an enforcement agency wait before picking up a transaction or series of transactions and then spend public money and resources on its investigation, adjudication, prosecution and resultant appeals etc. Ordinarily, in securities laws (distinct from criminal proceedings relating to violation of securities laws), there is no limitation period imposed upon SEBI to take up or complete an investigation. There is no limitation in terms of timer period for SEBI to pass an interim order or final order also. Whilst for SEBI there is no such time limitation, the Securities Appellate Tribunal (SAT) being an appellate body against the orders of SEBI, under the SEBI Act, 1992, is required to endeavor to dispose of the appeal within six (6) months. This aspect needs the urgent attention of the law reformers or Ministry of Finance which is the administrative ministry in relation to SEBI.

Also, it is odd that on hand SEBI through its regulations such as SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires listed companies to disclose material litigations on the stock exchange websites immediately, yet SEBI as a matter of practice does not discloses orders of Supreme Court and High Courts on its website that have been adverse to it.

It is high time that SEBI and other regulators changed their approach.

Sumit Agrawal is the Founder, Regstreet Law Advisors, author of a book on SEBI Act & a former SEBI Officer. The views are his own.